HJ 


•NRLF 


SB 


77h 


GIFT  OF 


TAXATION—A  PROBLEM 


BY 


ROGER  F.  STURQIS 


BOSTON 
BOSTON    NEWS   BUREAU    COMPANY 

1911 


TAXATION===A  PROBLEM 


BY 

ROGER  F.  STURGIS 


BOSTON 

BOSTON  NEWS  BUREAU  COMPANY 
1911 


Copyright,  191 1,  by 
BOSTON   NEWS   BUREAU   COMPANY 


Publications  on  Taxation 

OF  THE 

BOSTON  NEWS  BUREAU 


Inheritance  Taxes  for  Investors 

By  HUGH  BANCROFT 


$1.00 


A  handbook  showing  the  extent  to    which  the  resident  of   any  state  is 

affected  by  the  inheritance  tax  laws  of  every  other  state.     Includes 

a   synopsis  of  the  laws  of  every  state  and   Canada. 


Taxation  —  A  Problem 

By  ROGER  F.  STURGIS 


25  Cents 


A  discussion  of  the  evils  of  the  present   situation   from  a  Massachusetts 
standpoint,  with  a  plan  for  their  correction. 


BOSTON  NEWS  BUREAU 
25  Exchange  Place,  Boston 


235478 


TAXATION==A  PROBLEM. 


Questions  of  state  and  local  taxation;  questions  of  how 
revenue  shall  be  raised  to  pay  state  and  municipal  expenses, 
are  of  great  importance.  There  is  a  country- wide  cry  for  tax 
reform  but  no  two  persons  agree  upon  what  the  reforms  shall 
be.  If  I  were  to  undertake  to  review  the  different  forms  of  taxa- 
tion now  in  force  in  the  United  States  I  should  perforce  go  far 
beyond  the  limits  of  this  paper  and  the  same  would  be  true  of  an 
attempt  to  state  at  length  a  system  of  state  and  local  taxation. 
If  within  the  limits  of  this  paper  I  succeed  in  setting  forth  a  few 
of  the  glaring  faults  of  some  of  the  present  systems  and  in  stating 
some  remedies  that  may  appeal  to  the  business  world  I  shall  be 
satisfied. 

PARTIES    IN    TAXATION. 

We  have  first  the  economists  and  in  this  class  are  the  col- 
lege professors  who  regard  taxation  as  a  science  to  be  governed 
by  fixed  rules  and  if  a  working  system  permits  any  inequality 
they  condemn  it  as  vicious.  Stamp  taxes  are  as  a  rule  declared 
to  be  bad  economically  and  are  condemned.  It  is  now  the  fash- 
ion to  cry  down  the  general  property  tax.  The  economists  are 
no  more  in  agreement  as  to  remedies  than  the  rest  of  the  world. 
Some  are  single  taxers;  some  believe  in  the  taxation  of  incomes; 
some  advocate  a  habitation  tax,  recommended  by  the  Massachu- 
setts Commission  on  Taxation  of  1897;  one  believes  in  a  United 
States  graded  inheritance  tax,  while  another  thinks  that  the 
states  alone  should  impose  this  tax.  Business  and  professional 
taxation;  taxation  of  intangible  securities,  like  stocks  and  bonds, 
at  a  lower  rate  than  other  property  and  many  other  plans  have 
enthusiastic  supporters. 

We  have  next  a  class  who  would  probably  designate  them- 
selves as  practical  tax  men.  These  are  the  state  tax  commission- 
ers, the  local  assessors  and  those  members  of  legislatures  who  are 
looked  upon  by  their  colleagues  as  experts  on  taxation.  In 
this  class  we  find  the  ablest,  most  liberal  minded  men  on  the  one 
hand  and  the  most  prejudiced,  shortsighted  men  on  the  other. 
I  know  of  no  better  examples  of  the  good  element  than  the  mem- 
bers of  the  Department  of  Taxes  and  Assessments  of  New  York 
City.  The  good  element  realize  that  the  tax  laws  should  not 
be  administered  so  as  to  wring  the  last  cent  out  of  the  taxpayer 
but  equitably  and  that  the  taxpayer  should  be  fully  informed  of 


6 

his  rights.  If  a  law  seems  inequitable  they  use  their  influence 
to  have  it  changed.  The 'individual  may  have  his  hobby,  like 
every  other  tax  man,  but  he  realizes  that  what  is  wanted  is  a 
stable,  workable  system  that  will  produce  the  necessary  revenue 
and  seeks  to  administer  the  law  as  he  finds  it.  The  majority  of 
the  local  assessors  of  the  Massachusetts  type  are  to  be  classed 
with  the  good  element;  men  who  dealing  with  impossible  laws 
have  endeavored  to  distribute  the  tax  burdens  equally  among  the 
community.  I  shall  have  more  to  say  of  these  men  when  I  come 
to  the  working  of  the  general  property  tax.  But  there  are 
a  large  number  whose  first  thought  is  to  enforce  existing 
laws  to  the  letter,  not  always  commendable  in  taxation; 
to  take  every  possible  advantage  of  the  taxpayer  and  if  the  latter 
overlooks  or  is  ignorant  of  his  rights,  greatly  rejoice  and  urge 
before  legislative  committees  additional  tax  laws,  seeking  to 
get  more  and  more  revenue  without  the  least  regard  for  the  wel- 
fare of  the  community. 

We  then  come  to  the  taxpayers  who  very  naturally  look  upon 
the  assessors  and  collectors  as  enemies.  The  typical  individual 
thinks  that  any  taxation  that  happens  to  come  home  to  him  is  a 
species  of  robbery,  resents  bitterly  any  relief  given  to  another  and 
chuckles  over  a  law  that  gives  him  the  advantage.  It  is  astonish- 
ing to  find  how  ignorant  the  average  man  is  of  the  statutes  under 
which  he  is  taxed.  A  new  statute  is  proposed  and  the  man  on  the 
street  is  told  that  under  it  he  will  have  to  pay  less  taxes.  It 
may  be  bad  on  principle;  it  may  carry  in  its  train  great  future 
dangers;  never  mind,  it  if  lessens  his  taxes  it  must  be  good  and 
those  who  oppose  its  passage  are  denounced.  Circulate  a  peti- 
tion among  the  manufacturers  of  a  state  to  amend  the  constitu- 
tion with  an  alleged  intent  to  relieve  machinery  from  taxation 
and  they  will  sign  almost  to  a  man  and  with  only  one  thought; 
it  must  be  good  because  it  may  benefit  me. 

Lastly  we  have  the  great  class  who  do  not  pay  any  direct 
taxes,  other  than  a  poll  tax  (and  seldom  even  that),  who  must 
have  schools,  parks  and  playgrounds,  and  expect  their  more 
fortunate  friends  to  pay  for  them.  They  know  nothing  and  care 
nothing  about  taxation  but  are  important  as  a  class  in  that  their 
votes  elect  many  members  of  our  legislatures  and  city  councils 
who  do  not  as  a  rule  pay  taxes  to  any  material  amount. 

THE   GENERAL   PROPERTY  TAX. 

For  years  in  the  United  States  the  common  practice  has  been 
for  the  municipality  or  county  to  tax  its  residents  upon  their 
real  and  personal  property,  paying  the  state  a  proportion  of  the 
amount  collected. 

Real  estate  presents  very  little  difficulty.  It  cannot  escape 
taxation  and  as  taxation  should  be  based  upon  protection  and 
other  services  rendered  by  the  government,  it  is  of  course  most 


fitting  that  real  estate  should  bear  its  full  burden  of  local  taxa- 
tion. It  is  interesting,  however,  to  note  inequalities  in  real 
estate  taxation. 

According  to  the  last  United  States  Census  our  own  Suffolk 
County  has  the  proud  distinction  of  being  the  only  county 
in  the  United  States  taxing  real  estate  upon  a  valuation  of  100%. 
New  York  goes  as  high  as  98%,  while  the  average  tax  valuation 
in  Pennsylvania  is  58%.  Illinois  and  other  states  in  the  middle 
West,  presumably  to  meet  undervaluation  in  certain  cases,  have 
enacted  laws  providing  that  the  tax  shall  be  assessed  upon  a 
fixed  percentage  of  the  real  value.  Illinois  in  1898  went  as  low 
as  20%,  the  State  Board  of  Equalization  preparing  two  lists 
headed  "Full  Value"  and  "Assessed  Value/'  The  tax  rate  under 
this  plan  may  have  looked  too  high  to  the  legislators  in  1909, 
for  they  then  raised  the  percentage  from  one-fifth  to  one-third. 
It  is  conceivable  that  more  revenue  was  wanted  and  it  would 
be  well  for  advocates  of  the  three-mill  tax  to  keep  this  legislation 
in  mind.  This  Illinois  plan  must  cause  unsettlement  of  values 
and  is  indefensible.  Let  honest  assessors  value  land  and  build- 
ings fairly  and  conservatively  and  there  will  be  no  trouble  about 
the  real  property  tax. 

A  word  here  about  the  single  taxers  and  the  unearned  in- 
crement. The  average  man  on  the  street  with  his  money  in  his 
business  or  invested  in  securities  calls  himself  a  single  taxer 
by  which  he  means  that  in  his  opinion  real  estate  should  bear 
the  whole  burden  of  taxation  because  he  doesn't  own  any  and  he 
firmly  believes  that  he  is  now  paying  the  maximum  rsnt  for 
his  store,  house  or  apartment.  The  real  single  taxers  are  fol- 
lowers of  Henry  George  and  believe  that  all  land  belongs  to  the 
people  as  a  whole  and  that  while  the  individual  is  entitled  to 
the  income  from  his  improvements  he  should  pay  to  the  city  or 
town  a  fair  rent  for  the  land.  The  result  of  course  would  be  that 
no  one  could  afford  to  hold  unimproved  lands  and,  moreover? 
the  improvements  would  have  to  keep  pace  with  the  increase 
in  the  value  of  the  land.  Financial  panics  have  been  caused  by 
overbuilding  of  cities  as  well  as  railroads.  Many  ways  of  deter- 
mining andtaxing  the  unearned  increment  have  been  suggested 
and  pages  have  been  written  on  the  subject  but  no  writer  or 
speaker  has  yet  kept  his  feet  upon  the  ground  long  enough  to 
state  a  practical  workable  plan. 

The  old  fashioned  tax  upon  the  land  at  a  fair  valuation  still 
remains  the  best  and  simplest  form  of  taxation. 

Personal  property,  tangible  and  intangible,  presents  great 
difficulties  and  it  is  the  consensus  of  expert  opinion  that  the 
general  property  tax  as  applied  to  personal  property  as  admin- 
istered is  a  failure.  The  New  Jersey  Tax  Commissioner  in  his 
report  for  1907  says:  "It  is  now  literally  true  in  New  Jersey  as 
in  other  states  that  the  only  ones  who  pay  honest  taxes  on  personal 


8 

property  are  the  estates  of  decedents,  widows  and  orphans,  idiots 
and  lunatics." 

Let  us  first  deal  briefly  with  tangible  personal  property, 
like  cattle,  furniture  and  stock  in  trade.  The  United  States 
Supreme  Court  (Union  Transit  Co.  vs.  Kentucky,  199  U.  S. 
194)  has  put  tangible  property  into  the  same  class  with  real  es- 
tate and  declared  that  it  can  only  be  taxed  where  it  is,  without 
regard  to  the  residence  of  the  owner,  taxation  being  based  upon 
protection  and  services  rendered.  In  those  states  where  the 
owner  is  allowed  to  set  off  his  indebtedness  against  his  personal 
property,  e.g.,  New  York,  a  tax  on  tangible  personal  property 
is  no  hardship  and  on  principle  a  barrel  of  sugar  ought  to  be 
taxed  as  well  as  a  foot  of  land  but  on  principle  no  indebtedness 
should  be  allowed  to  be  set  off.  It  is  nevertheless  hard  to  tax 
a  man  $16  a  thousand  on  the  full  value  of  a  cargo  of  sugar  he  is 
carrying  as  in  Massachusetts  when  his  New  York  rival  is  taxed 
only  on  the  value  of  the  equity.  More  of  this  later. 

The  real  difficulties  arise  over  taxing  intangible  personal 
property,  like  bonds,  notes  and  shares  in  corporations,  and 
it  was  undoubtedly  to  this  class  of  securities  our  New  Jersey 
friend  referred.  To  ask  a  man  to  pay  1  6-10%  of  the  market 
value  of  a  four  per  cent,  bond  in  taxes  as  Massachusetts  does  at 
present  is  of  course  monstrous.  It  amounts  to  an  income  tax 
of  about  40%  while  the  highest  rate  of  income  tax  in  Europe  is 
20%,  the  usual  rate  being  5%.  The  same  thing  is  true  of  a 
first-class  railroad  stock  netting  the  holder  between  4%  and  5%. 
State  and  municipal  bonds  are  as  a  rule  and  shares  in  home 
corporations  are  always  exempt  from  taxation  and  that  fact  is 
a  serious  obstacle  to  finding  a  remedy  for  the  evil,  for  they 
have  acquired  a  higher  market  value  than  they  would  have  had 
were  they  not  tax  exempt,  and  there  would  be  a  great  shrinkage 
in  values  if  all  intangibles  were  exempted  from  taxation;  only 
less  so  if  intangibles  were  taxed  at  a  lower  rate  than  other 
property. 

The  taxation  of  shares  of  foreign  corporations  is  in  most 
instances  the  most  flagrant  case  of  double  taxation.  In  New 
York  they  are  not  taxed,  but  in  most  states  they  are.  In  Rhode 
Island  a  statute  was  passed  (P.  S.,  C.  57,  Sec.  9,  Cl.  8)  that  no 
shareholder  in  a  foreign  corporation  should  be  taxed  if  the  cor- 
poration in  its  corporate  capacity  is  taxed  for  an  amount  equal 
to  the  value  of  its  real  estate  and  tangible  personal  property,  and 
equal  to  the  market  value  of  its  shares,  but  the  Supreme  Court 
held  that  this  did  not  apply  to  the  American  Woolen  Co.  and  other 
New  Jersey  coporations. 

The  Supreme  Court  of  the  United  States  said  recently  that 
if  the  right  to  tax  foreign  shares  was  a  new  question  they  would 
have  grave  doubts  about  the  constitutionality  of  the  tax  and  a 
case  is  now  pending  in  that  court  upon  writ  of  error  from  the 


9 

Supreme  Court  of  Massachusetts  in  which  the  question  will  be 
finally  decided. 

In  New  York  bonds  and  notes  are  taxable  but  the  owner-is 
allowed  to  set  off  his  indebtedness,  which  right  is  availed  of  by 
business  men  who  are  carrying  stock  on  margin,  and  real  estate 
is  mortgaged  with  a  view  to  setting  off  the  mortgage  debt  against 
bonds.  This  cannot  be  done  in  Massachusetts. 

The  so-called  three  mills  tax  plan  has  been  urged  as  a  remedy 
for  the  evils  of  intangible  property  taxation.  This  is  copied 
from  the  state  tax  in  Pennsylvania  and  Maryland,  but  the  rate 
is  lower  than  in  those  states.  This  plan  carries  with  it  the  right 
of  the  legislature  to  classify  property  for  taxation  which  seems 
to  me  to  be  fraught  with  danger.  Believing  as  I  do  that  sooner 
or  later  we  must  give  up  taxing  intangible  property  I  am  strongly 
opposed  to  the  proposed  plan.  It  cannot  be  defended  on  princi- 
ple— and  the  rate  is  sure  to  be  changed  from  time  to  time  and  sta- 
bility, the  most  important  thing  in  taxation,  will  be  lacking.  In 
Maryland  and  Pennsylvania  where  the  plan  has  worked  fairly 
well,  there  was  practically  no  taxation  of  intangibles  before  the 
new  tax  was  imposed,  so  the  fact  of  an  increase  in  revenue  in 
those  states  is  no  argument  in  favor  of  substituting  it  for  the 
present  Massachusetts  system. 

There  is  one  thing  that  the  history  of  intangible  personal 
property  taxation  shows  conclusively.  It  will  fail  if  rigidly 
enforced  and  is  only  successful  as  a  revenue  producer  by  the  use 
of  doomage  by  local  assessors  who  do  not  feel  it  their  duty  to 
enforce  the  law  to  the  letter, but  try  honestly  and  conscientiously 
to  determine  what  it  is  fair  each  individual  should  pay,  the  indi- 
vidual having  the  right  of  appeal.  Before  the  Massachusetts 
Tax  Commission  of  1908  launched  their  three  mills  plan,  Massa- 
chusetts reached  for  taxation  approximately  four  hundred  and 
fifty  millions  of  intangible  personal  property,  more  in  proportion 
to  wealth,  than  any  other  state  ever  did  under  the  general  prop- 
erty tax  and  almost  half  as  much  as  Pennsylvania  did  under  its 
four  mills  tax,  so  that  Massachusetts  with  its  average  sixteen 
mills  tax  got  twice  as  much  revenue  as  Pennsylvania.  Then 
trustees  who  had  to  show  their  securities  in  the  Probate  Courts 
could  easily  buy  home  stocks  yielding  a  fair  return  and  pay  a  tax 
on  only  a  portion  of  their  estates.  Today  the  activities  of  the 
Tax  Commissioner  and  the  supervisors  of  taxation  with  all  the 
sources  of  information  given  by  inheritance  tax  and  corporation 
returns  at  hand,  are  unearthing  much  new  property,  but  I  firmly 
believe  that  in  a  very  few  years  we  will  have  the  experience  of 
Ohio  and  other  states  and  our  cities  and  towns  will  find  that  they 
have  killed  the  goose  that  laid  the  golden  egg.  There  never  was 
such  a  demand  for  non-taxable  securities  and  I  know  of  a  num- 
ber of  instances  where  men,  who  under  the  old  system,  were 
doomed  and  paid  the  tax  on  a  third  or  a  half  of  their  securities 


10 

and  never  thought  of  buying  non-taxables,  are  now  putting  their 
whole  property  out  of  the  reach  of  the  taxing  powers.  How 
many  wealthy  men  who  have  summer  places  in  Massachusetts 
have  made  Massachusetts  their  legal  residence?  Ohio  knows 
well  that  the  threat  of  leaving  the  state  will  be  carried  out  if 
men  of  property  are  driven  too  far.  The  public  may  scoff  at  the 
rich  man  but  his  millions  are  mighty  useful  to  the  community 
he  chooses  to  make  his  residence.  Ohio  allowed  the  tax  gatherers 
to  collect  back  taxes  stretching  over  a  number  of  years  with  the 
result  that  many  of  its  citizens,  men  whom  they  could  not  afford 
to  lose,  left  the  state.  It  was  said  colloquially  "rich  men  no  longer 
die  in  Ohio." 

There  is  no  hope,  however,  of  restoring  the  old  Massachusetts 
system  if  we  wanted  to.  The  result  was  the  only  thing  worthy 
of  praise.  We  are  living  at  a  time  when  the  public  demands  that 
the  laws  shall  be  enforced  to  the  letter  and  we  must  find  some 
system  of  taxation  that  will  yield  sufficient  revenue  to  the  state 
and  city  and  at  the  same  time  attract  business  and  wealth. 

A  PLAN  OF  TAXATION. 

The  letter  paper  of  the  National  Tax  Association  is  headed 
with  what  has  been  called  the  Golden  Rule  of  Taxation: 

Never  tax  anything 

That  would  be  of  value  to  your  state 

That  could  and  would  run  away  or, 

That  could  and  would  come  to  you. 

Try  to  devise  a  tax  system  that  will  appeal  to  fair  minded 
men  so  that  every  one  knows  that  he  is  paying  his  fair  share  of 
the  taxes  and  there  will  be  no  running  away.  I  know  of  nothing 
more  discouraging  than  to  see  on  the  one  hand  the  tax  enthusiast 
arguing  before  a  legislative  committee  in  favor  of  some  additional 
form  of  tax,  piling  burden  on  burden,  without  thought  of  principle 
or  result,  and  on  the  other  the  capitalist  seeking  to  obtain  some 
special  advantage  or  to  defeat  some  wise  law  because  it  happens 
to  affect  his  special  interest,  and  thirdly  to  realize  from  questions 
put  by  the  committee  that  not  more  than  one  in  ten  knows 
anything  about  the  tax  laws  of  his  state. 

In  trying  to  outline  a  general  plan  of  taxation  I  lay  no  claim 
to  originality  or  infallibility.  Any  plan  must  be  experimental 
and  it  is  of  the  first  importance  that  it  should  yield  sufficient 
revenue.  We  must  see  to  it  that  our  revenues  are  honestly 
and  economically  expended,  that  is,  we  must  get  a  dollar's  worth 
for  each  dollar  spent.  We  must  and  will  have  public  improve- 
ments and  our  demands  are  bound  to  increase  from  year  to  year. 

INSTANCES     OF     INEQUALITY. 

One  of  the  greatest  instances  of  inequality  in  taxation  is 
found  in  apportioning  the  state  tax  among  the  cities  and  towns 


11 

upon  a  basis  of  the  valuation  of  taxable  property,  the  rates  in  the 
cities  and  towns  varying,  in  Massachusetts  last  year,  from  $4. 30 
a  thousand  in  Dover  to  $25  in  Chester.  On  the  other  hand,  a 
general  personal  property  tax,  as  a  source  of  state  revenue  or 
to  be  collected  by  the  state  for  the  localities  at  a  uniform  rate 
would  be  unfortunate  for  collecting  the  state  tax  at  one  rate  and 
the  local  tax  at  another  would  cause  endless  confusion.  It  is 
very  important  moreover,  to  the  success  of  any  property  tax 
that  the  taxpayer  should  be  in  close  touch  with  the  taxing  power, 
such  as  can  and  should  exist  between  the  taxpayer  and  the  city 
and  town  government.  The  state  is  more  remote  and  towns 
in  one  part  of  the  state  may  obtain  advantages  over  towns  in 
another.  The  state  should  leave  the  general  property  tax  to 
the  cities  and  towns  and  derive  its  revenue  from  wholly  different 
sources,  a  policy  generally  known  as  the  separation  of  state 
and  local  revenues.  This  policy  is  practically  followed  in  New 
York  today  and  it  seems  to  me  with  marked  success. 

Let  me  quote  from  an  address  of  Solomon  Wolff  of  the 
Louisiana  state  tax  commission.  After  discussing  the  difficulties 
arising  under  the  property  tax  he  said: 

"A  remedy  for  this  does  exist,  a  remedy  simply  and 
effective,  and  that  is  the  separation  of  sources  from 
which  the  state  and  local  taxes  are  drawn.  Let  the 
state  obtain  all  the  revenue  it  needs  from  the  sources 
it  may  select,  and  say  to  the  counties  and  municipalities, 
all  the  rest  of  the  property  you  may  tax  for  your  pur- 
poses as  you  see  proper."  Again  he  said: 

"Human  fallibility  and  various  pernicious  influences 
will  perhaps  always  prevent  those  ideal  conditions,  but 
the  more  intimate  relation  between  the  tax  payer  and  the 
taxing  authorities  which  will  result  from  home  rule  in 
these  matters,  is  certain  to  make  far  better  conditions 
than  we  now  have." 


SOURCES  OF  STATE  REVENUE. 

The  state  should  leave  the  property  tax  to  the  localities  and 
should  get  its  revenue  from  excises  which  may  be  defined  as  taxes 
on  the  privilege  of  transmitting  and  receiving  property  in  trade 
or  by  will  or  descent  or  on  the  privilege  of  doing  something  gen- 
erally or  in  a  particular  manner.  Under  the  Massachusetts 
constitution  an  excise  need  only  be  reasonable  and  need  not  be 
proportional.  Customs  duties  are  of  course  barred  from  the 
states  as  a  source  of  revenue  but  there  is  left  a  tremendous  field 
to  choose  from  and  legislators  have  only  to  refrain  from  imposing 
burdensome  taxes  upon  some  particular  class  of  business,  the 
doing  and  maintaining  of  which  contributes  to  the  welfare  of  the 
community. 


12 


THE    INHERITANCE    TAX. 

First  in  order  is  the  inheritance  tax  or  the  tax  on  the  privi- 
lege of  transmitting  and  receiving  by  will  or  deed  or  by  descent 
property  on  the  death  of  the  owner.  The  constitutionality  of 
this  form  of  taxation,  and  particularly  the  graded  feature  of  the 
tax,  that  is,  exemptions  and  an  increased  rate  for  different 
amounts,  has  been  bitterly  fought  but  is  now  finally  settled. 
Some  of  the  state  courts  have  held  on  the  principle  of  the  control 
of  the  sovereign  over  the  passing  of  property  after  death  that  an 
act  taking  the  entire  property  would  be  constitutional  but  the 
great  majority  have  in  dicta  drawn  the  line  at  confiscation  but 
what  would  be  regarded  as  confiscation  has  not  yet  been  decided 
in  this  class  of  cases.  At  no  time  in  a  man's  life  will  he  pay  a 
tax  more  willingly  than  when  he  is  about  to  inherit  money,  provided 
the  tax  is  reasonable  in  amount  and  the  machinery  for  the  collection 
of  the  tax  is  not  used  to  assist  the  local  tax  gatherer  to  drag  him 
down  by  unreasonable  and  confiscatory  taxation. 

As  to  rates  imposed  in  the  taxation  of  inheritances,  we  still 
have  much  to  learn  from  the  English,  French  and  Germans.  In 
England  there  are  three  forms  known  as  the  estate  duty  (tax  on 
the  estate  in  general  both  real  and  personal) ;  the  legacy  duty  (tax 
on  so  much  of  the  personal  property  as  goes,  whether  by  will  or 
intestacy,  to  the  legatees  or  next  of  kin),  and  the  succession  duty 
which  applies  to  real  and  leasehold  estates  and  to  all  personal 
estate  not  subject  to  legacy  duty,  such  as  legacies  charged  on  land . 

There  are  many  exemptions  in  each  class  and  it  may  be  of 
interest  to  call  attention  to  a  few  to  show  how  insignificant 
they  are  when  compared  to  our  state  laws.  Sums  under  £100 
are  exempted  from  the  estate  duty,  also  annuities  not  exceeding 
£25,  also  pensions  payable  by  the  Indian  government  to  widow 
or  child.  Some  of  the  exemptions  from  the  legacy  duty  are 
legacies  to  husband  or  wife,  estates  under  £100,  property  passing 
to  lineal  ancestors  or  descendants  which  is  chargeable  with  estate 
duty  and  estates  when  the  net  value  of  the  property,  real  and  per- 
sonal, does  not  exceed  £1000  and  estate  duty  has  been  paid 
thereon.  The  exemptions  from  the  succession  duty  are  sub- 
stantially the  same  as  in  case  of  the  legacy  duty. 

The  rates  for  the  estate  duty  are  graded  from  1%  on  estates 
between  £100  and  £500  to  10%  on  the  first  £1,000,000  of  estates 
over  £3,000,000  and  15%  on  the  remainder.  The  legacy  duty 
and  succession  duty  are  based  on  degree  of  relationship;  lineal 
ancestor  or  descendant  1%,  brother  or  sister  or  descendant  of 
either  3%,  uncle  or  aunt  or  descendant  of  either  5%,  great  uncle 
or  great  aunt  or  descendant  of  either  6%,  and  more  remote 
degree  or  strangers  10%.  In  1906  these  duties  yielded  £17,- 
344,925,  or  roughly  $85,000,000.  In  Massachusetts  the  yield 


13 

in  1909  was  under  $1,500,000.  In  New  York  the  yield  under 
the  old  law  of  1%  direct  and  5%  collateral  was  $6,500,000. 

In  France  there  is  a  tax  on  transfers  at  death  and  orr  gifts 
between  the  living  and  there  are  no  exemptions.  The  rate  is 
graded  according  to  amount  and  relationship  from  1%  on  amount 
under  2000  francs  passing  in  direct  line  to  20j%  on  amounts  over 
fifty  million  francs  to  strangers.  The  yield  in  1906  was  roughly 
forty  eight  million  dollars. 

Under  the  United  States  national  inheritance  and  succession 
tax  of  1862  the  greatest  yield  in  any  one  year  (1870)  was  $3,- 
091,825.  Underthelawof  1898  the  yield  in  1903  was  $5,356,774.90. 

In  1907  at  the  first  national  conference  of  the  National 
T^ax  Association  it  was  unanimously  resolved  that  it  was  the  sense 
of  the  conference  that  inheritance  taxes  should  be  reserved  wholly 
for  the  use  of  the  several  states  and  that  the  federal  government 
should  raise  its  revenue  from  different  sources  and  this  resolve 
has  been  approved  every  year  since. 

The  great  majority  of  states  have  now  adopted  inheritance 
tax  laws  and  are  deriving  a  very  large  state  revenue  therefrom. 
The  imposition  of  such  a  tax  by  the  federal  government  would 
be  an  additional  burden  and  the  harshest  kind  of  double  taxation. 
The  writer  regards  the  inheritance  tax  as  a  corner  stone  of  any 
successful  plan  of  state  and  local  taxation. 

Bonds  the  foreign  state  cannot  tax  unless  actually  in  the 
state  but  they  can  tax  shares  in  their  own  corporations  owned 
by  non-resident  decedents  and  payment  is  insured  by  holding 
the  corporation  liable  if  shares  are  transferred.  This  in  the  great 
majority  of  cases  results  in  double  taxation  and  is  unfortunate. 
A  few  states,  among  them  Massachusetts,  where  they  control 
the  general  succession,  give  a  credit  for  the  amount  property  is 
taxed  elsewhere,  that  is,  the  tax  rate  being  2%,  if  shares  are 
taxed  2%  or  more  elsewhere  Massachusetts  does  not  tax  those 
shares.  If  they  are  taxed  less  than  2%  elsewhere  the  tax  is  only 
for  the  balance  up  to  2%.  This  has  always  seemed  to  me  ex- 
tremely altruistic  and  it  may  affect  the  revenue  from  inheritance 
taxes  severely.  So  long  as  people  are  compelled  to  invest  in 
home  shares  by  our  general  property  tax  it  may  not  make  much 
difference,  but  if  this  is  done  away  with  and  Massachusetts  in- 
vestors are  free  to  invest  their  money  elsewhere  it  will  be  very 
serious. 

Only  two  states  have  the  right  to  exact  the  tax,  one  the  state 
of  the  domicil  and  the  other  the  state  in  which  the  corporation  is 
incorporated,  but  some  states,  as  Illinois,  seek  to  collect  a  tax 
on  the  ground  that  the  corporation  owned  property  in  Illinois. 
Hardly  less  absurd  is  the  attempt  to  exact  a  tax  because  the  cor- 
poration has  a  license  as  a  foreign  corporation  to  do  business  in 
Illinois.  This  brings  me  to  what  has  always  seemed  to  me  to  be 
one  of  the  greatest  evils  in  the  operation  of  our  tax  system — 


14 

the  disposition  of  the  tax  authorities  to  avoid  or  postpone 
having  the  legality  of  a  tax  determined  in  the  hope  that  people  will 
pay  the  tax  rather  than  contest  it.  It  is  akin  to  highway  rob- 
bery. 

The  right  to  impose  inheritance  taxes  is  based  upon  the  use 
of  the  Probate  Courts  in  the  settlement  of  estates  and  there  can 
be  no  doubt  that  the  state  in  which  the  deceased  had  his  resi- 
dence, the  state  of  the  general  succession,  should  have  the  first 
right  to  the  tax.  Real  estate  of  the  deceased  passes  under  the 
laws  of  the  state  of  its  situs,  the  inheritance  tax  is  paid  there 
and  the  state  of  the  domicil  makes  no  claim  to  tax  it.  Personal 
property  is  different  for  that  must  be  accounted  for  by  the  execu- 
tor or  administrator  in  the  Probate  Court  of  the  county  of  which 
the  deceased  was  a  resident.  If  the  personal  property,  tangible 
or  intangible,  happens  to  be  in  another  state  at  the  time  of  the 
death  the  state  in  which  it  is  can  compel  the  executor  or  adminis- 
trator to  take  out  special  or  ancillary  administration,  although 
the  courts  are  practically  unanimous  in  upholding  a  delivery 
of  personal  property  to  a  foreign  executor  without  such  admin- 
istration. Mr.  Justice  Holmes  has  termed  this  control  of  the 
foreign  state  over  personal  property  the  control  over  the  special 
succession  as  distinct  from  the  general  succession  controlled  by 
the  state  of  the  domicil  of  the  deceased.  The  right  of  the  state 
having  control  of  the  special  succession  to  demand  an  inheritance 
tax  upon  the  property  within  its  boundaries  has  been  upheld 
by  the  United  States  Supreme  Court  in  Blackstone  vs.  Miller 
and  that  dec  sion  opened  a  very  Pandora's  Box  of  trouble. 

The  commission  appointed  in  1897  to  inquire  into  the  ex- 
pediency of  revising  and  amending  the  laws  of  Massachusetts 
relating  to  taxation,  James  R.  Dunbar,  then  a  judge  of  the 
Superior  Court,  T.  Jefferson  Coolidge  and  Professor  F.  W. 
Taussig  of  Harvard  College  being  members,  recommended  an 
inheritance  tax  at  a  flat  rate  of  5%  on  all  estates  over  $200. 
This  same  commission  proposed  the  habitation  tax  as  a  substi- 
tute for  taxing  intangible  personal  property.  Utah  now  has  a 
flat  5%  rate  which  through  its  control  of  transfers  of  Union  Pacific 
Railway  stock,  yields  a  large  revenue.  New  York  for  a  long 
time  stuck  to  a  flat  rate  of  1%  for  direct  gifts  and  5%  for  col- 
laterals, but  last  year  the  legislature  copied  the  European  graded 
tax  and  the  great  majority  of  the  states  have  adopted  the  same 
plan.  The  graded  tax  has  been  declared  constitutional  by  the 
Supreme  Court  of  the  United  States  and  has  proved  a  great 
revenue  producer. 

The  English  system  of  three  kinds  of  tax  seems  to  me  cum- 
bersome but  I  do  not  regard  the  rates  as  excessive,  if  the  inheri- 
tance tax  is  to  be  the  first  source  of  state  revenue.  Under 
the  estate  tax  there  are  21  different  rates,  per  cent,  based  on  the 
amount  of  the  estate,  running  as  I  have  said  from  1%  to  15%. 
An  estate  of  between  $50,000  and  $125,000  is  taxed  4%,  an  es- 


15 

tate  between  $250,000  and  $375,000,  5%,  and  an  estate  between 
$1,250,000  and  $2,500,000,  8%.  This  is  entirely  reasonable. 
I  should  not  favor  adopting  the  legacy  and  succession  duties 
in  terms  but  should  provide  that  property  passing,  whether  by 
will  or  interstate  laws,  between  husband  and  wife,  to  lineal  an- 
cestors and  descendants,  to  the  widow  of  a  son  or  husband  of  a 
daughter  or  to  an  adopted  child,  should  not  be  taxed  again,  the 
estate  tax  having  been  paid.  Property  passing  to  collaterals 
I  should  tax  again  upon  the  plan  of  the  legacy  duty,  varying 
the  rate  according  to  degree  of  relationship  and  I  regard  the 
English  rates  as  reasonable. 

Brother  or  sister  or  descendants  of  either 3% 

Uncle  or  aunt  or  descendants  of  either    5% 

Great  uncle  or  great  aunt  or  descendants  of  either       6% 

More  remote  degree  or  strangers 10% 

Under  this  system  a  legatee  for  a  specific  amount  would  pay 
one  of  the  above  rates  and  the  estate  tax  would  not  affect  him, 
but  if  a  brother  and  sister  divided  the  estate  of  a  deceased  brother 
dying  worth  $500,000  above  his  debts,  each  would  bear  his  or 

her  share  of  the  estate  duty,  6%,  and  pay  an  additional  tax  of 

007 

»/0« 

The  state  tax  of  Massachusetts  apportioned  among  the 
different  cities  and  towns  amounted  in  1909  to  $4,500,000.  The 
commission  of  1897,  fourteen  years  ago,  stated  that  their  5% 
flat  rate  would  yield  not  less  than  $2,500,000.  The  English 
plan  adopted  with  the  modifications  pointed  out  would  yield  at 
least  three  times  that  amount  in  view  of  the  great  increase  in 
wealth. 

CORPORATION    TAXES. 

In  New  York  and  Pennsylvania  the  privilege  of  doing  busi- 
ness in  corporate  form  is  taxed,  while  in  Massachusetts  persons, 
whether  individuals  or  partnership,  are  driven  to  incorporate 
by  the  tax  laws.  In  New  York  the  corporation  is  taxed  locally 
upon  its  property  like  an  individual  and  pays  an  additional 
tax  to  the  state.  In  Massachusetts  corporations  are  taxed 
locally  on  real  estate  and  machinery  and  are  taxed  by  the  state 
upon  what  is  termed  the  value  of  the  franchise.  The  Tax 
Commissioner  from  the  market  value  of  the  shares  or  from  any 
other  information  obtainable  determines  the  value  of  the  corpor- 
ate stock,  deducts  the  value  of  real  estate  and  machinery  and 
taxes  the  balance  at  the  average  local  rate  in  the  state,  approxi- 
mately $17  a  thousand.  If  the  good  will  is  very  valuable  and 
the  market  value  of  the  shares  is  to  any  extent  affected  by  the 
good  will,  that  element  of  value  is  taxed,  but  with  the  great 
majority  of  business  corporations  the  shares  have  no  market 
value  and  the  commissioner  gets  at  the  value  of  the  franchise 
by  deducting  the  liabilities  from  the  assets,  a  thing  that  the  local 


16 

assessors  cannot  do  in  taxing  the  stock  in  trade  of  an  individual 
or  a  firm.  By  having  a  large  bonded  debt  a  corporation  can  keep 
the  value  of  its  shares  about  on  a  par  with  its  real  estate  and 
machinery. 

In  Pennsylvania  tangible  personal  property  is  not  taxed 
locally  either  to  the  individual  or  the  corporation,  but  the  state 
corporation  taxes  are  heavy  and  the  small  manufacturers  or 
business  firms  do  not  incorporate  as  a  rule.  A  business  requiring 
large  amounts  of  capital  must  adopt  the  corporate  form  and  can 
better  afford  to  pay  for  the  privilege  than  a  business  carried  on 
with  a  moderate  capital. 

The  method  of  distributing  the  corporation  tax  in  Massachu- 
setts until  1908  was  as  absurd  as  any  tax  plan  ever  adopted. 
The  state  retained  that  portion  of  the  tax  represented  by  shares 
owned  by  non-residents  and  distributed  the  balance  among 
the  cities  and  towns  in  which,  from  the  returns  or  other  evidence, 
it  appeared  that  resident  owners  resided  on  the  preceding  tax 
day,  according  to  the  number  of  shares  so  held  in  such  cities  and 
towns  respectively,  the  cities  and  towns  giving  police  and  fire 
protection  to  the  properties  getting  nothing.  This  is  still  true  of 
railroad,  telegraph  and  telephone  companies.  Street  railways 
were  regarded  as  different  from  railroads  and  only  the  proportion 
of  the  tax  corresponding  to  the  proportion  of  the  line  constructed 
on  private  land  was  distributed  under  the  above  rule,  the  balance 
going  to  the  several  cities  and  towns  in  proportion  to  the  length 
of  tracks  operated  in  their  streets.  In  1909  one  half  the  tax  and 
in  1910  the  whole  tax  from  business  corporations,  representing 
shares  owned  by  residents,  was  given  to  the  cities  and  towns  in 
which  the  business  of  the  corporation  was  carried  on.  The  state 
held  fast  to  its  proportion  representing  shares  belonging  to  non- 
residents. 

Foreign  corporations  doing  business  in  Massachusetts  are 
taxed  locally  like  any  individual  and  the  state  taxes  them  one 
fiftieth  of  one  per  cent,  on  their  authorized  capital  stock  but  the 
amount  in  any  one  year  cannot  exceed  $2000.  This  Act  does 
not  apply  to  foreign  corporations  engaged  solely  in  interstate 
commerce  and  the  Act  is  probably  unconstitutional  if  the  cor- 
poration is  engaged  in  interstate  commerce  to  a  material  amount. 

I  leave  out  of  consideration  the  fees  charged  in  the  different 
states  for  organizing  corporations  for  it  is  only  in  New  Jersey 
that  they  are  of  moment.  In  Massachusetts  they  amounted  in 
1909  to  $117,485.75  and  in  New  York  to  $300,000.  These  are 
clearly  a  proper  source  of  state  revenue  and  under  liberal  corpora- 
tion laws  and  inducements  to  corporate  capital  to  engage  in 
business  in  the  state  the  revenue  should  be  an  increasing  one. 

The  New  York  state  corporation  tax  may  be  said  to  be 
based  upon  the  ability  to  pay  dividends  and  it  is  assessed  upon 
both  home  and  foreign  corporations  in  proportion  to  the  amount 


17 

of  capital  employed  within  the  state.  There  is  a  small  license 
fee  of  one  eighth  of  one  per  cent,  upon  the  amount  of  the  capital 
stock  of  foreign  corporations  employed  in  the  state  and  this  is 
an  original  and  not  an  annual  payment  but  if  in  any  year  an 
increased  amount  of  capital  is  employed  then  the  state  license 
fee  is  payable  upon  the  increase. 

In  1910  the  Comptroller  in  his  report  suggests  an  amend- 
ment of  Section  182  of  the  tax  law  so  that  it  might  be  free 
from  all  uncertainties  as  to  intent  and  interpretation  and  the 
statute  recommended  by  him  seems  to  me  worthy  of  a  place  in 
any  proposed  system  of  taxation.  For  the  privilege  of  doing 
business  or  exercising  its  corporate  franchises  in  the  state  every 
corporation,  joint  stock  company  or  association  shall  pay  to 
the  State  Treasurer  an  annual  tax  to  be  computed  upon 
the  basis  of  the  amount  of  its  capital  stock,  employed 
during  the  preceding  year  within  the  state.  The  measure 
of  the  amount  of  capital  stock  employed  in  the  state  shall 
be  such  proportion  of  the  issued  capital  stock  as  the  gross 
assets  employed  in  any  business  within  the  state  bear  to  the 
gross  assets  wherever  employed  in  business.  For  purposes  of 
taxation  the  capital  of  a  corporation  invested  in  the  stock  of  any 
corporation  shall  be  deemed  to  be  assets  located  where  the 
physical  property  represented  by  such  stock  is  located. 

The  capital  would  be  taxed  as  follows: 

1. — If  no  dividend  is  declared  the  tax  shall  be  at  the  rate 
of  three-fourths  of  a  mill  on  each  one  dollar  of  the  par  value  of 
the  capital  stock.  This  is  seven  and  one-half  cents  on  each  $100 
shares  and  the  tax  on  one  million  of  capital  would  be  $750. 

2. — If  a  dividend  or  dividends  of  less  than  6%  are  made 
or  declared  the  tax  shall  be  at  the  rate  of  one  and  one-half  mills 
on  each  dollar  of  capital  at  a  valuation  not  less  than  its  actual 
value,  nor  less  than  the  average  price  at  which  the  stock  sold 
during  the  year,  but  if  such  an  assessment  will  produce  a  tax 
less  than  would  be  produced  by  a  tax  upon  the  par  value  of  the 
amount  of  issued  capital  stock  employed  in  the  state,  the  tax  being 
at  the  rate  of  three-fourths  of  a  mill  on  the  par  value,  then  the 
tax  shall  be  assessed  at  three-fourths  of  a  mill  on  each  dollar  of 
the  par  value  of  the  stock. 

3. — If  a  dividend  or  dividends  of  6%  or  more  are  declared 
or  made  then  the  tax  is  at  the  rate  of  one-fourth  of  a  mill  for 
each  1%  of  dividends  on  each  dollar  of  the  par  value  of  such 
issued  capital  stock.  This  is  two  and  one  half  cents  on  each 
$100  share  multiplied  by  the  dividend.  If  6%  is  paid  the  tax 
on  one  million  of  capital  would  be  $1500. 

4. — Every  corporation  subject  to  taxation  shall  pay  a  mini- 
mum tax  of  $5. 

The  New  York  tax  law  exempts  certain  corporations  taxed 
under  special  statutes  from  this  tax,  such  as  banks,  savings 


18 

banks,  title,  insurance  and  surety  companies,  trust  companies, 
elevated  and  street  railways  but  it  would  be  better  to  do  away 
with  all  exemptions  and  impose  an  additional  tax  if  the  special 
business  done  requires  more  from  the  state  than  the  ordinary 
business  corporation.  The  exemptions  in  New  York  are  very 
confusing  and  there  is  a  great  deal  of  special  legislation.  Manu- 
facturing corporations  are  exempt,  as  they  are  in  Pennsylvania, 
to  the  extent  of  the  capital  employed  in  the  state  in  manufac- 
turing and  in  the  sale  of  the  product  of  such  manufacturing. 
In  view  of  my  plan  of  local  taxation  to  be  described  later  and  the 
great  benefit  to  be  derived  by  manufacturing  corporations  I 
do  not  regard  this  exemption  as  necessary  or  wise. 

There  is  no  doubt  that  the  state  is  entitled  to  an  additional 
tax  from  transportation  companies  and  it  should  be  based  upon 
gross  earnings  and  should  be  light  and  for  constitutional  reasons 
confined  to  intrastate  business.  In  New  York  steam  rail- 
road, canal,  ferry,  express,  navigation,  pipe  line,  transfer, 
baggage  express,  telegraph,  telephone,  and  sleeping  car  com- 
panies pay  a  tax  of  5-10  of  1%  upon  gross  earnings. 

In  New  York  a  distinction  is  drawn  between  railroads 
operated  by  steam  and  railroads  operated  by  some  other  motive 
power,  presumably  because  the  latter  are  for  the  most  part  in 
the  streets  of  cities  and  towns.  These  railways  pay  an  annual 
tax  of  1%  upon  gross  earnings  from  all  sources  within  the  state 
and  3%  upon  .the  amount  of  dividends  declared  or  paid  in  ex- 
cess of  4%.  Corporations  formed  for  supplying  water  or  gas 
or  for  electric  or  steam  heating,  lighting  or  power  purposes  pay, 
like  railroads,  a  tax  of  5-10  of  1%  on  the  gross  earnings  and  at 
the  same  rate  as  street  railways  upon  dividends  paid.  These 
corporations  and  street  railways  are  exempt  from  the  general 
corporation  tax. 

A  uniform  tax  of  5-10  of  1%  on  the  gross  earnings  of  all  these 
companies,  leaving  them  also  subject  to  the  general  corporation 
tax,  would  be  much  better. 

Insurance  companies,  trust  companies  and  savings  banks 
are  all  taxed  specially  and  are  properly  exempt  from  the  general 
corporation  tax.  Insurance  companies  pay  1%  on  the  gross 
amount  of  premiums  received  during  the  preceding  calendar  year 
for  business  done  at  any  time  in  the  state.  Trust  companies 
pay  1%  on  the  amount  of  capital  stock,  surplus  and  undivided 
profits.  Savings  banks  pay  1%  on  the  par  value  of  the  surplus 
and  undivided  earnings.  They  are  all  allowed  a  credit  for  New 
York  state  bonds  held  by  them  bearing  interest  at  a  rate  not  ex- 
ceeding 3%,  but  from  the  nature  of  the  tax  there  should  be  no 
exemptions.  A  curious  example  of  double  taxation  is  found  in 
the  fact  that  although  trust  companies  are  taxed  by  the  state  on 
capital  stock,  surplus  and  undivided  profits,  they  are  also  taxed 
locally  on  real  estate.  The  same  is  true  of  savings  banks.  It 


19 

would  seem  fairer  for  the  state,  in  the  case  of  trust  companies  at 
least,  to  deduct  the  value  of  real  estate. 

New  York  also  taxes  foreign  bankers  but  this  seems  wholly 
wrong  on  principle  and  does  not  even  have  the  merit  of  yielding 
a  large  revenue.  It  amounted  to  only  $44,749.83  in  1909, 

The  following  table  from  the  comptroller's  report  of  1909  is 
instructive  as  showing  the  amount  of  state  revenue  derived  from 
the  New  York  corporation  tax: 
Insurance 

Premiums $1,237,173.55 

Transportation : 

Earnings 1,339,352.52 

Capital  stock    903,350.62 

Telegraph  &  Telephone : 

Earnings 191,492.13 

Capital  stock    184,732.59 

Miscellaneous: 

Capital  stock 1,226,306.76 

Gas,  water,  power,  etc. 

Earnings 487,963.04 

Foreign  banks 44,749.83 

License  fees 25,129.84 

Trust  companies 2,141,508.56 

Savings  banks 890,160.76 

8,671,920.20 

The  taxation  of  shares  of  national  banks  is  restricted  by  the 
National  Bank  Act  (R.  L.,  Sec.  5219).  Each  state  may  deter- 
mine and  direct  the  manner  and  place  of  taxing  these  shares 
but  the  taxation  must  not  be  at  a  greater  rate  than  is  assessed 
upon  other  moneyed  capital  in  the  hands  of  individual  citizens 
of  such  state,  and  shares  owned  by  non-residents  must  be  taxed 
in  the  cities  or  towns  where  the  bank  is  located. 

National  banks  owe  nothing  to  the  state  and  under  any 
system  of  taxation  where  banking  capital  is  taxed  locally,  their 
shares  as  representing  the  value  of  their  capital,  surplus  and 
undivided  earnings  should  be  taxed  for  the  benefit  of  the  locality. 
This  is  recognized  in  New  York,  the  Tax  Law  (Sec.  24)  providing 
for  the  assessment  of  bank  shares  at  their  book  value  and  at  a 
uniform  tax  rate  of  1%  throughout  the  state. ?  This  is  collected 
by  the  localities  and  does  not  pass  through  the  hands  of  the  state. 
In  1908  the  tax  in  the  five  Boroughs  of  New  York  City  amounted 
to  $3, 09 1,406.  The  figure  of  1%  corresponding  with  the  trust 
company  rate  perhaps  satisfies  the  restriction  in  the  Bank  Act. 
In  Massachusetts  the  state  and  locality  play  pass  ball  with 
the  national  bank  tax.  The  statute  (Acts  1909,  C.  490,  Pt.  Ill, 
Section  11-20)  begins  by  declaring  that  bank  shares  shall  be 
assessed  to  the  owner  in  the  city  or  town  in  which  the  bank  is 
located  at  their  fair  cash  value  at  the  same  rate  as  other  moneyed 


20 

capital  in  the  hands  of  citizens  is  assessed.  The  bank  pays 
the  tax  to  the  collector  and  the  cashier  gives  the  assessors  a  sworn 
list  of  the  shareholders  with  their  addresses.  This  list  the  assess- 
ors transmit  to  the  tax  commissioner.  Then  some  bookkeeping 
takes  place.  A  charge  in  favor  of  the  Commonwealth  against 
the  city  or  town  collecting  the  tax  is  entered  for  the  tax  assessed 
upon  shares  not  owned  by  residents  of  the  city  or  town.  If  it 
appears  from  the  list  that  some  shares  belong  to  residents  of 
another  city  or  town,  its  account  with  the  state  is  credited  with 
the  amount  of  the  tax  collected  on  account  of  those  shares. 
That  part  of  the  tax  representing  shares  owned  by  non-residents 
of  Massachusetts,  by  a  process  of  elimination,  the  state  credits 
itself  with.  This  seems  to  me  one  of  the  most  grotesque  statutes 
known  to  tax  law. 

The  exemption  of  intangibles  and  tangible  personal  property 
used  in  manufactures,  trade  or  business  from  all  taxation  being 
next  to  revenue  the  most  important  element  in  my  plan  of  taxa- 
tion, I  admit  that  the  taxation  of  national  banks  presents  a  very 
difficult  question.  It  would  be  a  hardship  to  tax  state  banks  and 
trust  companies  on  their  capital  and  let  national  banks  go  free. 
We  certainly  cannot  under  the  Bank  Act  allow  a  city  or  town  to 
exempt  moneyed  capital  from  taxation  and  at  the  same  time  tax 
bank  shares.  The  national  bank  like  the  state  bank  or  trust 
company  will,  like  the  individual,  pay  local  taxes  upon  its  real 
estate,  its  fixtures  and  furniture.  It  does  not  owe  its  right  to  do 
business  to  the  state,  but,  on  the  other  hand.it  does  not  differ  in 
its  relations  to  the  state  from  foreign  corporations  doing  business 
in  the  state.  The  state,  to  be  sure,  cannot  prevent  the  national 
bank  from  doing  business  in  the  state  nor  make  the  payment  of  a 
license  fee  a  condition  precedent  to  its  right  to  do  business  in  the 
state,  but  it  may  tax  it  "at  the  same  rate  as  other  moneyed  capital 
in  the  hands  of  citizens."  If  the  state  taxes  the  bank  at  the 
same  rate  it  taxes  its  own  banks  and  trust  companies  it  will  in  my 
opinion  comply  with  the  restriction  imposed  by  the  Bank  Act. 
The  question  is  a  difficult  one  and  can  only  be  determined  by  a 
decision  of  the  Supreme  Court.  I  am  in  favor  of  a  tax  on  national 
banks  as  a  source  of  state  revenue. 

Stock,  grain  and  cotton  exchanges  should,  I  believe,  con- 
tribute their  share  to  the  state  revenue,  based  on  the  amount  of 
business  done.  The  tax  should  be  small  so  as  not  to  limit 
transactions,  for  the  greater  the  business  the  greater  the  return. 
In  this  class  I  include  the  New  York  stock  transfer  tax  under 
which  $5,355,546.16  was  collected  in  1909,  at  a  cost  of  8-10  of 
1%,  the  rate  being  two  cents  upon  each  share  of  stock  of  the  par 
value  of  $100  sold.  I  do  not  believe  that  the  imposition  of  this 
tax  has  had  any  effect  upon  the  number  of  shares  dealt  in  upon 
the  New  York  Stock  Exchange. 


21 


AUTOMOBILE    LICENSE    FEES. 

The  present  Massachusetts  plan  of  applying  license  fees  to 
the  construction  and  maintenance  of  state  roads  seems  to  me 
excellent.  The  municipalities  should  be  satisfied  with  the  prop- 
erty tax  on  the  automobile  itself.  The  revenue  from  licenses 
should  be  an  increasing  one  and  the  size  of  the  fees  should  de- 
pend upon  the  amount  needed  for  the  state  highways. 

SOURCES  OF  LOCAL  REVENUE. 

The  separation  of  state  and  local  revenue  being  based  upon 
home  rule  and  the  close  relations  between  the  individual  and  the 
municipality,  it  is  essential  that  every  member  of  a  community 
should  feel  that  he  is  paying  something  towards  the  expense  of 
the  city  or  town  and  that  it  is  for  his  interest  to  see  that  the  city 
or  town  is  run  for  the  benefit  of  its  citizens  as  members  of  the 
corporation  and  certain  departments  should  be  made  self  sup- 
porting and  if  possible  contribute  something  to  the  common 
fund.  For  example,  the  Boston  Water  Department  revenue 
in  1909  fell  behind  expenses  by  $218,563.49.  The  expenses 
of  the  Boston  Building  Department  in  the  same  year  amounted 
to  almost  $100,000.  In  the  operation  of  the  East  Boston  Fer- 
ries the  deficit  in  1909  for  the  year  was  $132,703.80.  Rates 
and  fees  should  be  so  adjusted  as  to  make  this  impossible.  The 
courts  should  be  open  to  rich  and  poor  alike  but  there  is  no 
reason  in  my  opinion  why  a  litigant  should  be  allowed  to  enter 
his  case  upon  the  payment  of  $1  in  the  Municipal  Courts  and 
$3  in  the  Superior  Courts  and  be  charged  no  fees  in  the  Probate 
Courts.  A  scale  of  fees  should  be  adopted  sufficient  to  pay  the 
expenses  of  the  clerk's  offices,  of  the  Registries  of  Probate  and 
of  the  Registries  of  Deeds.  The  cost  of  these  offices  is  of  course 
paid  by  the  county  but  the  expenses  of  the  county  fall  upon  the 
several  cities  and  towns  within  its  borders. 

TAXES    ON    REAL    ESTATE. 

Coming  to  the  question  of  local  revenue  from  taxation,  real 
estate  and  buildings  will  always  be  the  chief  source  of  revenue. 
In  New  York  City  in  1910  the  real  estate  of  the  five  boroughs  was 
assessed  at  the  enormous  sum  of  $7,044,192,674  and  the  per- 
sonal property  at  $372,644,825,  tangible  and  intangible,  a 
trifle  over  5%  of  the  real  estate  valuation.  In  the  state  of  Massa- 
chusetts in  1907  real  estate  was  assessed  at  $2,746,005,835 
and  personal  property  at  $766,551,769,  about  28%  of  the  real 
estate  valuation,  In  the  City  of  Boston  last  year  real  estate 
was  assessed  at  $1,118,989,100  and  personal  property  at  $287,- 
559,000.  We  do  not  in  my  opinion  need  to  tax  the  unearned 
increment  and  we  must  remember  that  the  man  who  does  not 


22 

improve  his  land  is  paying  taxes  and  interest  charges  year 
after  year  and  that  in  many  cases  people  get  a  net  return 
from  their  buildings  of  1%  or  2%  and  their  loss  in  income  must 
be  charged  against  the  increased  value  of  their  land  when  sold, 
if  there  be  an  increase  to  charge  it  against. 

Every  one  not  a  pauper  pays  something  in  the  way  of  rent 
and  thus  indirectly  pays  a  part,  however  small,  of  the  local  taxes 
for  rent  must  in  the  great  majority  of  cases  be  affected  by  taxes, 
Possibly  it  would  be  a  good  thing  if  every  landlord,  following  the 
example  of  the  owners  of  one  State  Street  building,  put  in  the 
monthly  rent  bill  an  item  giving  the  proportional  amount  of  the 
tax  on  the  property  charged  against  the  room. 

As  I  have  already  said,  the  old  fashioned  tax  upon  the  land 
at  a  fair  valuation  still  remains  the  best  and  simplest  form  of 
taxation.  In  Pennsylvania  where  there  is  no  local  taxation  of 
personal  property,  machinery  is  under  the  decisions  treated  as  a 
part  of  the  mill  or  manufactory  and  is  taxed  as  real  estate,  and 
this  seems  to  me  right,  for  the  value  of  the  plant  equipped  can  be 
easily  determined. 

TAXATION   OF  TANGIBLE   PERSONAL  PROPERTY. 

Your  horses  and  carriages,  automobiles,  furniture,  pictures, 
jewelry  and  the  like  all  derive  benefit  from  the  municipality,  and 
as  they  are  generally  to  be  found  where  the  owner  resides  they 
should  be  taxed  there  arid  I  include  in  this  list  all  personal 
property  not  held  and  used  in  farming,  in  manufacturing  or  in 
trade,  and  those  I  should,  following  the  example  of  Pennsylvania 
exempt  from  taxation.  I  do  this  on  the  ground  of  the  great 
benefit  to  the  community  in  promoting  business  and  business 
enterprises.  Has  Massachusetts  done  anything  to  attract 
capital?  Haven't  our  industries  thriven  in  spite  of  legislation 
rather  than  by  reason  of  it?  Our  rivers  furnish  great  water 
power,  we  have  excellent  harbors,  our  railroads  connect  with  the 
north,  west  and  south.  Let  it  be  said  that  in  Massachusetts  a 
factory  can  be  built  and  be  taxed  only  upon  real  estate  and  ma- 
chinery, and  if  a  corporation  by  the  state  for  a  small  amount 
based  on  dividends  paid,  and  I  believe  that  in  a  few  years  there 
would  be  a  period  of  prosperity  and  an  increase  in  real  estate 
values  in  cities  and  towns  hitherto  unknown.  Say  to  the 
leather,  the  wool,  the  sugar  or  the  cotton  man  that  his  importa- 
tions will  not  be  taxed,  and  we  will  see  the  old  Boston  business 
in  those  commodities  return.  Let  the  farmer  feel  that  his  tools, 
his  grain  and  his  cattle  are  not  taxed  and  there  will  be  a  great 
incentive  to  cultivate  the  land.  The  objector  cries  out  that  the 
city  and  town  must  have  the  money,  but  one  new  mill  in  a  town 
will  mean  more  for  the  town  than  the  small  tax  revenue  at  present 
derived  from  the  above  sources. 

Let  us  look  into  the  revenue  derived  today  by  the  city  of 


23 

Boston  from  taxation  of  tangible  personal  property.  The 
personal  property  of  foreign  corporations  is  taxed  locally  like  that 
of  a  firm  or  of  an  individual,  but  as  has  been  seen,  the  Massachu- 
setts corporation  is  taxed  on  its  personal  property  by  the  state 
through  the  franchise  tax,  and  as  in  Massachusetts  the  practice 
of  incorporating  is  almost  universal,  Boston  derives  its  revenue 
from  the  personal  property  of  these  home  corporations  through 
the  state  treasurer,  the  state  retaining  so  much  of  the  tax  as 
represents  shares  owned  by  non-residents  of  Massachusetts. 
The  tatal  personal  property  assessment  of  last  year  was  $287,- 
559,000,  and  the  city  received  from  the  state  as  its  share  of  the 
business  corporation  tax  $691,429.71.  The  late  Mr.  Hills  in  a 
well-thought  out  paper  figured  that  3-7ths  of  the  personal  property 
taxed  was  tangible  and  4-7 ths  intangible.  A  part  of  the  corpora- 
tion tax  represents  intangibles  and  good  will.  Assuming  that 
there  is  the  same  proportion  as  in  the  case  of  personal  property 
taxed  locally,  we  have  a  total  assessed  valuation  for  tangible 
personal  property  of  $123,535,896,  which  at  a  tax  rate  of  $16.50 
would  yield  $2,038,342.28.  How  much  of  this  revenue  is 
derived  from  tangible  personal  property  not  used  in  manufactur- 
ing or  in  trade,  still  to  be  taxable  under  my  plan,  cannot  be 
figured  with  any  degree  of  accuracy,  but  the  proportion  is  large. 
Figuring  on  total  assessed  value  of  real  and  personal  property  for 
1910,  including  the  national  bank  tax  at  a  tax  rate  of  $16.50  a 
thousand  we  have  a  revenue  of  $24,112,833.21  of  which  the 
revenue  from  tangible  personal  property  is  about  8%  of  the  total. 
The  new  taxes  proposed  will  not  only  make  up  for  this  but  will 
.give  a  large  increase  of  revenue. 

In  Lawrence,  where  the  great  bulk  of  tangible  personal 
property  would  be  found  in  the  mills,  the  city  received  from  the 
state  in  1910  on  account  of  the  business  corporation  tax  $192,- 
674.59,  a  sum  easily  obtained  under  other  methods  of  taxation 
without  considering  the  advantage  to  the  city  of  new  manufac- 
turing plants. 

TAXATION    OF    INTANGIBLE    PERSONAL    PROPERTY. 

By  intangible  property  is  meant  money,  debts  due,  bonds  and 
notes,  shares  of  stock  in  corporations  and  the  like.  The  attempt 
to  tax  these  in  almost  every  case  results  in  double  taxation  and 
the  tax  cannot  be  justified  by  services  rendered  in  the  protection 
of  the  property.  How  can  a  piece  of  paper  which  says  that  A.  B. 
in  Michigan  or  the  corporation  in  Kansas  owes  C.  D.,  a  resident 
of  Massachusetts,  a  sum  of  money  be  regarded  as  property  deriv- 
ing a  benefit  from  being  in  Boston?  The  same  is  true  of  a  piece  of 
paper  saying  that  you  have  an  interest  in  a  corporation  operating 
a  flour  mill  in  Minnesota.  If  taxed  at  the  same  rate  as  other 
property,  the  result  is  an  income  tax  amounting  to  a  third  of  the 
income.  If  a  special  low  rate  is  established  for  this  class  of 


24 

property  it  is  subject  to  change  by  the  legislature  and  there  is 
no  stability.  I  have  already  discussed  these  questions  at  some 
length. 

I  believe  in  abandoning  entirely  the  attempt  to  tax  intangibles 
as  property,  and  until  we  do  this  we  can  never  have  any  satis- 
factory, workable  tax  system.  The  attempt  to  enforce  the  tax 
strictly  as  is  now  being  done  in  Massachusetts  can  only  result  in 
failure  and  disaster. 

The  majority  of  the  Tax  Commission  of  1897  in  their  report 
said  of  this  tax : 

"It  is  hap-hazard  in  its  practical  working  and  hence 
demoralizing  alike  to  taxpayers  and  to  tax  officials." 
Taxation,   however,   is   not   based   solely   on   protection   to 
property.     The  individual  owes  much  to  the  community  and  he 
should  pay  a  tax  according  to  his  means  and  his  means  are  best 
shown  by  his  income.     Let  us  leave  this  subject  therefore  until 
the  income  tax  is  reached  in  its  order. 

TAXATION    OF    MORTGAGES. 

Massachusetts  long  ago  abandoned  the  mortgage  tax  and 
New  York  exacts  a  tax  only  when  the  mortgage  is  made.  The 
borrower  will  always  have  to  pay  the  tax,  either  directly  or  in- 
directly by  paying  a  higher  rate  of  interest  than  he  would  if  there 
were  no  tax.  The  power  to  borrow  money  to  improve  property 
or  to  use  in  trade  and  business  at  the  best  possible  rates  is  of 
great  importance  to  the  welfare  of  the  community  and  any  tax 
that  checks  this  power  is  bad.  The  real  estate  already  pays 
one  tax  and  a  mortgage  tax  presents  a  clear  case  of  double  taxa- 
tion. I  believe  that  a  tax  on  mortgages  of  real  estate  forms  no 
part  of  a  good  system  of  taxation.  I  do  believe,  however,  in  a 
recording  fee  large  enough  to  make  the  registry  of  deeds  self- 
supporting.  Massachusetts  taxes  mortgages  on  property  out 
of  the  state  but  it  is  difficult  to  see  how  a  paper  affecting  title 
to  real  estate  in  another  state  and  recorded  in  that  state  can  be 
regarded  as  property  in  Massachusetts  for  purposes  of  taxation. 
It  can  only  be  supported  constitutionally,  as  a  tax  on  the  debt 
and  taxation  of  intangibles  forms  no  part  of  my  proposed  plan 
of  taxation. 

LIQUOR      AND      OTHER      LICENSES. 

I  have  already  said  that  I  believed  in  a  moderate  tax  on  deal- 
ings in  stock  and  other  exchanges  as  a  source  of  state  revenue  but 
there  are  certain  special  kinds  of  business  that  owe  nothing  to  the 
state  and  everything  to  the  municipality.  I  refer  particularly  to 
the  theatre,  the  hotel  and  liquor  business,  all  of  which  should  be 
and  are  licensed.  These  fees  belong  to  the  municipality  as  a 
matter  of  right  and  common  sense.  This  is  particularly  true  of 
liquor  licenses  in  states  where  there  is  local  option  and  the  Massa- 


chusetts  statute  (R.  L.,C.  100,  Section  45)  requiring  the  treas- 
urer of  the  city  or  town  to  pay  one-fourth  of  the  license  fees 
to  the  state  seems  to  me  the  height  of  absurdity  from  an  economic 
standpoint.  I  have  already  said  that  I  believed  automobile 
licenses  should  be  applied  as  they  are  in  Massachusetts  to  the 
construction  and  repair  of  state  highways.  Cities  and  towns 
should  derive  a  large  revenue  from  the  property  tax  upon  auto- 
mobiles, a  tax  easily  collected  and  difficult  to  evade,  and  in  return 
for  this  tax  they  are  bound  to  furnish  good  local  roads. 

THE  FRANCHISE  OR  LOCAL  MONOPOLY  TAX. 

In  the  plan  outlined  by  me  for  state  revenue  the  public 
service  corporation  is  treated  like  any  business  corporation  and 
pays  a  small  tax  based  upon  dividends  paid  and  a  tax  of 
from  J  to  1%  upon  gross  earnings.  It  is,  however,  to  the 
municipality  that  the  public  service  corporation  owes  most  and 
its  most  valuable  asset,  the  right  to  use  the  street,  should  be 
taxed  locally.  Under  the  modern  theory  of  a  regulated  monopoly 
it  is  most  important  that  these  rights,  these  local  franchises  or 
monopolies  should  be  taxed.  Professor  Loos,  speaking  before 
the  second  national  tax  conference  in  1908,  said  of  this  form  of  tax : 

"Indeed  we  may  speak  of  this  source  of  revenue   as 
one  of  the  undeveloped  sources  of  revenue  in  our  cities. 
Continental  cities  have  gone  much  further  in  the  exploi- 
tation of  this  admirable  source  of  revenue.     But  a  splen- 
did beginning  has  been  made  in  a  few  of  our  states,  not- 
ably in  the  State  of  New  York  by  the  passage  of  the 
Ford  Special  Franchise  Tax  Law  in  1899." 
Referring     to   the   public    service     corporation,     Professor 
Loos  says : — 

"It  was  found  that  the  permanent  franchise  pos- 
sessed by  a  company  put  that  company  into  a  position 
of  practically  defying  the  city  and  it  was  not  until  the 
taxing  power  against  the  actual  value  of  the  franchise 
was  employed  that  this  company  became  amenable  to 
local  control." 

If  a  public  corporation  operates  in  part  through  a  subway, 
for  the  use  of  which  it  pays  a  rent  to  the  city,  whether  it  pays  a 
franchise  tax  on  that  portion  of  its  line  depends  upon  the  terms 
of  the  lease  but  the  rental  should  in  my  opinion  always  include 
the  tax.  Moreover,  the  tax  should  not  be  imposed  in  cases 
where  leases  are  already  in  operation. 

Let  us  see  how  this  form  of  taxation  works  in  New  York 
City.  The  real  estate  of  the  corporation  is  taxed  locally  like 
that  of  any  other  owner,  but  the  State  Board  of  Tax  Commis- 
sioners fixes  the  value  of  the  special  franchise  in  each  WUW, 
certifies  it  to  the  local  assessors  and  the  franchise  is  taxed  at  the 
local  rate,  in  the  Borough  of  Manhattan  1.75790  cents  in  1910. 


26 

The  working  of  the  system  is  well  shown  in  the  case  of  the  New 
York  Central  Railway.  The  local  assessors  assess  the  tracks 
from  50th  street  on  the  west  side,  north  to  the  city  line,  because 
these  tracks  run  on  the  private  right  of  way  owned  by  the  rail- 
road company.  The  tracks  from  50th  street  and  the  Grand 
Central  Station  running  north  on  Park  avenue  are  assessed  by 
the  State  Board  because  they  are  in  a  street.  In  1909  the  State 
Board  valued  the  New  York  Central  franchise  at  $4,437,500 
(City  Record  1909),  and  in  1910,  at  $4,679,300.  In  their 
report  for  1909  the  Commissioners  of  Taxes  and  Assessments 
(p.  20)  say  that  the  law  itself  is  unsatisfactory,  and  it  is  doubtful 
whether  anything  short  of  a  radical  change  will  work  a  satis- 
factory solution,  but  this  seems  to  be  aimed  against  the  wording 
of  the  law  rather  than  against  it  as  an  element  of  local  taxation. 
They  point  out  the  difficulties  of  determining  whether  certain 
property  should  be  assessed  by  them  or  by  the  State  Board . 

The  results  in  the  way  of  revenue  are  excellent.  These 
figures  are  for  the  five  boroughs  of  the  City  of  New  York: 

Total  valuation  of  special  franchises,  1908 $492,490,477 

Total  valuation  of  special  franchises,  1909 474,001,900 

Total  valuation  of  special  franchises,  1910    465,409,600 

In  the  report  of  the  Commissioners  of  Taxes  and  Assessments 
for  1909  they  attribute  the  decrease  between  1908  and  1909  to 
the  reduction  in  the  price  of  gas  and  electricity  which  has  reduced 
the  value  of  franchises  of  lighting  companies. 

This  presents  an  interesting  question  in  connection  with  a 
reduction  of  rates  by  legislative  action.  What  will  the  people 
say  if  the  effect  is  to  increase  the  tax  on  their  homes?  There  will 
be  an  additional  argument  against  confiscatory  rates.  The 
corporation  must  be  allowed  to  live  and  its  franchise  must  be 
made  valuable. 

Here  are  some  of  the  special  franchise  valuations  in  the 
Borough  of  Manhattan  for  1909  taken  from  the  City  Record: 

New  York  Edison  Co $37,301,000 

New  York  Telephone  Co 27,360,000 

Pennsylvania  Tunnel  &  Terminal  Co.    ...        15,000,000 

Consolidated  Gas  Co.  apart  from  sub-cos.        20,001,000 

Interboro'  Rapid  Transit  Co.,  independent 

of  subways  and  sub-companies    20,012,000 

This  special  franchise  tax  is  not  limited  to  public  service 
corporations  and  is  imposed  upon  individuals  even,  who  exercise 
a  special  franchise,  e.g.,  John  Smith  maintains  a  scale  in  101st 
street  and  his  right  to  do  this  is  valued  bythe  State  Board  at  $500 
and  he  is  taxed  accordingly. 

The  success  of  this  special  franchise  or  monopoly  tax  depends ' 
of  course  upon  having  tax  boards  of  ability  and  of  the  highest 
integrity.     This  can  be  said  of  the  New  York  State  Board  of  Tax 
Commissioners,  of  the  Commissioners  of  Taxes  and  Assessments 


27 

of  the  City  of  New  York,  of  the  Massachusetts  Tax  Commissioner 
and  of  that  most  unjustly  abused  body,  the  Board  of  Assessors 
of  the  City  of  Boston,  and  the  chance  of  having  inefficient  or 
corrupt  boards  in  the  future  is  practically  nil.  I  am  in  favor  of 
a  state  board  to  determine  the  value  of  these  special  franchises. 
We  have  now  provided  for  direct  local  taxation  for  local 
revenue  upon  real  estate,  tangible  personal  property  not  used  in 
manufacturing,  business,  trade  or  farming  and  on  the  value  of 
special  franchises  or  monopolies  to  be  fixed  by  a  state  board  and 
for  licenses  fees  from  innkeepers,  theatres  and  the  like  and  from 
liquor  dealers  but  this  is  not  enough  nor  does  it  reach  every  citizen 
and  make  him  share  in  the  expenses  of  the  government.  This 
can  only  be  accomplished  and  then  not  completely  by  the  imposi- 
tion of  an  income  tax  about  which  much  is  now  being  said  and 
written.  To  treat  of  the  income  tax  fully  would  require  a 
separate  treatise.  Men  differ  with  regard  to  it  as  they  do  about 
all  questions  of  taxation.  However  imposed,  I  believe  the 
revenue  should  go  to  the  cities  and  towns  and  if  I  succeed  in 
stating  a  case  showing,  however  imperfectly,  a  workable  income 
tax  plan  for  local  revenue  I  shall  be  satisfied. 

THE    INCOME    TAX. 

Many  students  of  taxation  are  in  favor  of  an  income  tax  but 
are  not  agreed  upon  how  it  shall  be  imposed  and  many  in  their 
enthusiasm  for  a  complete  and  thorough  collection  of  a  tax 
ignore  everything  else.  Today  the  question  of  a  United  States 
income  tax  is  before  the  country  and  it  is  said  by  those  in  favor 
of  it  that  the  national  government  can  alone  deal  successfully 
with  the  problem  of  collection.  It  can  compel  every  corporation 
in  the  country  to  pay  to  the  government  a  percentage  of  the 
amounts  paid  out  for  interest  and  in  dividends.  This  is  called 
collecting  from  the  source.  Could  anything  be  further  removed 
from  the  theory  of  home  rule  in  taxation !  What  would  become  of 
a  community  if  every  man,  who  did  not  have  the  opportunities 
of  his  neighbor,  allowed  his  neighbor  to  monopolize  all  the  oppor- 
tunities! I  believe  it  will  be  an  unfortunate  day  for  this  country 
when  the  federal  government  resorts  to  the  property  tax  for  its 
revenue  in  competition  with  the  states,  cities  and  towns,  on  the 
plea  that  it  is  in  a  better  position  to  collect  the  tax,  and  a  tax  on 
individual  incomes  is  a  tax  on  property.  Professor  Seligman, 
who  contributes  the  latest  work  on  the  income  tax,  reaches  the 
conclusion  that  neither  the  federal  government  nor  the  state 
really  need  the  money  and  that  the  cities  and  towns  do  and  says 
(page  655) : 

"The  solution  is  really  not  complicated.  Why  is 
it  not  possible  to  secure  all  the  ends  of  general  suitabil- 
ity by  having  a  tax  administered  by  the  national 
government  under  direct  national  supervision,  and 


28 

secure  all  the  ends  of  adequacy  and  fiscal  necessity  by 
having  the  proceeds  apportioned,  to  a  large  extent  at 
least,  to  the  various  states,  perhaps  to  be  further  appor- 
tioned by  the  states  in  part  or  whole  to  the  localities? 
This  seems  to  be  the  real  solution:     Let  the  national 
government  assess  the  tax,  and  let  the  state  and  local 
governments  share  in  the  proceeds  of  the  tax." 
To  make  the  federal  government  tax  collector  for  the  cities 
and  towns  seems  to  me  centralization  carried  to  an  extreme  and 
I  fear  that  when  the  tax  reached  the  locality  the  result  would  be 
a  sad  disappointment. 

A  federal  income  tax  so  far  as  collected  at  the  source,  i.e. 
from  the  corporations,  would  be  only  another  corporation  tax. 
Indeed  Mr.  Justice  Day  says  in  the  corporation  tax  cases  that 
the  tax  is  imposed  upon  the  doing  of  business  and  the  measure 
of  the  tax  is  to  be  the  income.  No  one  would  be  required  to 
make  any  return  of  his  income  from  dividends  and  bond  interest 
for  the  corporation  would  pay  direct  to  the  treasury.  It  is  not 
to  be  expected  that  the  payment  of  this  tax  by  the  corporation 
would  affect  the  dividends  or  interest  paid  by  the  corporation. 
Suppose  the  rate  were  5%  and  a  corporation  was  paying  dividends 
of  6%,  the  corporation  would  not  send  checks  for  $5.70  for  each 
share  but  would  continue  to  pay  6%  and  charge  the  tax  to  expense 
account  as  they  do  the  present  corporation  tax.  In  Pennsyl- 
vania the  state  tax  on  bonds  is  collected  at  the  source,  i.  e., 
the  corporation  nominally  deducts  the  amount  of  the  tax  from 
the  amount  of  the  coupon,  if  the  bond  is  owned  by  a  resident, 
but  most  Pennsylvania  bonds  are  issued  today  tax  paid. 

In  England,  where  the  income  tax  rate  is  Is  2d,or  roughly 
5%,  it  is  said  that  four-fifths  of  the  tax  is  collected  at  the  source 
and  the  result  in  revenue  has  been  very  successful.  In  England 
a  much  larger  portion  of  the  people  than  in  the  United  States 
live  on  the  income  from  invested  property,  but  in  1902-3  the 
profits  and  salaries  of  persons  and  firms  amounted  to  over  one 
billion  dollars  (£211,200,000,  Kennan  Income  Taxation,  70) 
and  it  has  been  said  by  some  one  that  neither  bookmaker, 
clergyman  nor  politician  escapes.  Collection  from  the  indi- 
vidual has  been  thorough  in  England  for  many  years.  Baron 
Martin,  in  Attorney  General  vs.  Black,  6  Exch.  78,  said: 

"In  fact  the  care  displayed  in  embracing  every 
possible  source  of  profit  is,  I  may  say,  carried  to  an  almost 
ludicrous  extent;  it  is  practically  impossible  to  escape 
the  operation  of  the  Act." 

Parliament  does  not  rely  upon  collection  at  the  source  but 
has  entire  confidence  in  its  ability  to  collect  from  the  individual. 
This  is  shown  in  the  new  super  tax  which  is  not  deducted  at  the 
source  but  is  paid  directly  by  the  person  liable.  If  the  income 
of  a  tax  payer  exceeds  in  net  amount  £5000  a  year,  a  super  tax 


29 

of  6d  on  the  pound  is  imposed  upon  so  much  of  the  income  as 
exceeds  £3000.  It  is  thought  in  England  that  this  super-  tax 
will  yield  about  £4,000,000  gross.  Under  the  English  acts 
there  are  so  many  rebates  and  allowances  that  complete  indivi- 
dual returns  are  essential  to  the  proper  working  of  the  tax  and 
severe  penalties  are  imposed  which  I  shall  discuss  later. 

Let  us  return  now  to  the  United  States  and  the  attempt  to 
collect  the  tax  at  the  source.  The  tax  so  collected,  in  my  opinion, 
will  have  little  or  no  effect  upon  those  living  upon  the  income  from 
invested  property,  but  business  and  professional  incomes  are 
also  to  be  taxed  and  this  tax  must  be  collected  from  the  individual, 
and  the  federal  government  is  not  in  as  good  a  position  to  collect 
this  tax  as  the  state  or  municipality.  The  rule  that  the  wider 
the  base  the  better  chance  of  collection  applies  to  unearned  in- 
come but  the  converse,  in  my  opinion,  is  true  of  an  income  tax 
upon  earned  income. 

Collection  at  the  source  tends  to  remove  that  most  important 
element  in  any  plan  of  taxation  that  every  citizen  should  be  taxed 
according  to  his  means  and  should  know  that  he  is  paying  his 
share  towards  the  expenses  of  the  locality  in  which  he  lives. 

To  impose  an  income  tax  in  addition  to  a  general  personal 
property  tax,  as  is  proposed  in  a  bill  before  the  Massachusetts 
legislature  of  1911,  is  vicious.     The  income  tax  has  only  been 
successful  where  it  has  been  substituted  for  the  personal  property 
tax.     In  England  this  was  brought  about  in  the  middle  of  the 
last  century  and  of  this  Professor  Seligman  says  (page  641): 
"There  the  local  taxes  were  for  a  long  time  assessed 
on  personalty  as  well  as  realty,    and    the  attempt  to 
confine  the  local  rate  to  real  estate  met  with  somewhat 
the  same  difficulty  that  is  encountered  at  present  in 
the  United  States.     It  was  not  until  shortly  before  the 
middle  of  the  nineteenth  century  that  the  local  taxes 
or  rates  as  they  are  called  were  limited  to  real  estate; 
and  it  was  only  a  few  years  prior  to  this  that  the  national 
income  tax  was  imposed." 

In  Wisconsin  the  experiment  of  the  substitution  of  an  income 
tax  for  the  personal  property  tax  is  now  being  tried  and  it  is 
believed  by  those  in  authority  that  it  will  be  successful. 

The  present  tax  laws  of  Massachusetts  strictly  administered 
must  result,  as  I  have  said,  in  a  diminishing  revenue  from  the 
personal  property  tax.  We  cannot  tell  accurately  how  large  the 
annual  income  of  Massachusetts  citizens  is,  but  there  are  straws 
which  point  to  over  a  billion  dollars.  The  dividend  payments 
dispensed  each  year  in  the  City  of  Boston  by  Massachusetts 
corporations  are  said  to  amount  to  $225,000,000,  and  it  is  fair  to 
assume  that  a  very  large  proportion  of  the  shareholders  are  citi- 
zens of  Massachusetts.  A  very  large  percentage  of  the  stock  of 
the  American  Sugar  Co.  is  held  in  Massachusetts.  The  same  is 


30 

true  of  many  of  the  great  dividend-paying  corporations  of  the 
country.  Think  what  the  yield  would  be  under  a  2%  income  tax 
in  comparison  with  our  present  personal  property  tax  at  an  aver- 
age rate  of  1.6%.  No  man  ought  to  object  to  paying  2%  of 
his  income  towards  the  public  expense  though  every  man  must 
make  full  disclosure,  but  there  the  collection  at  the  source  ad- 
vocate shakes  his  head.  I  believe  this  can  be  accomplished  if 
the  assessment  and  collection  of  the  tax  is  placed  in  the  hands 
of  a  well-paid  state  board,  penalties  made  sufficiently  severe 
both  for  failing  to  make  correct  returns  and  for  divulging  the 
returns  when  made. 

In  England  the  penalty  for  neglecting  to  make  a  return  or 
for  making  an  untrue  or  incorrect  return  is  £20  and  treble  the 
duty  chargeable.  A  penalty  not  exceeding  £5  may  be  imposed 
for  neglect  to  make  a  return  even  though  the  person  proceeded 
against  proves  that  he  was  not  chargeable  for  duties.  A  taxpayer 
in  receipt  of  an  annual  income  of  £2,000  makes  a  return  annually 
for  three  years  of  but  £1 .200.  He  will  have  to  pay  to  the  revenue 
a  sum  of  £420,  being  three  times  the  penalty  and  nine  times  the 
amount  of  the  tax  of  £40. 

Of  course  the  making  of  a  false  return  should  be  punishable 
as  perjury  and  on  the  other  hand  the  disclosure  of  individual 
income  tax  returns  or  their  publication  should  be  made  a  mis- 
demeanor. 

Business  and  professional  incomes  vary  from  year  to  year 
and  it  would  be  well  to  adopt  the  English  plan  of  computing  the 
tax  on  the  average  income  for  three  completed  years.  If  the 
business  has  not  been  in  existence  for  three  years  the  tax  is 
computed  upon  the  average  income  for  its  term. 

I  have  said  that  the  income  tax  should  be  assessed  and 
collected  by  a  state  board  and  I  realize  that  in  what  I  am  about 
to  say  I  am  not  holding  to  my  plan  of  home  rule  in  taxation. 
This  part  of  my  plan  for  an  income  tax  may  be  wrong  on  principle 
but  I  believe  the  results  will  warrant  the  departure. 

The  boards  of  assessors  in  a  few  of  the  larger  cities  or  towns 
might  be  able  to  handle  the  tax,  but  in  the  great  majority  of  cases 
the  work  would  be  entirely  beyond  them,  and  a  state  board  would 
also  be  further  removed  from  local  influence. 

I  am  also  in  favor  of  one  rate  for  the  whole  state.  If  in- 
comes were  taxed  locally  at  the  local  rates  there  would  be  the 
same  inducement  to  change  one's  residence  that  there  is  today. 
On  the  other  hand,  if  incomes  were  taxed  locally  at  the  uniform 
state  rate  one  or  two  rich  men  in  a  town  might  give  far  more  than 
the  needs  of  the  town  demanded  and  the  tax  rate  on  other  prop- 
erty fall  so  low  as  to  bring  about  an  exodus  from  other  cities  and 
towns  of  the  state. 

The  question  then  arises  of  what  disposition  is  to  be  made 
of  the  tax  when  collected  by  the  state  board.  First,  all  the  ex- 


31       V  /•'.  -:    *'  :•"••*:  •;.•  ••. .' :  /. 

penses  of  the  board  should  be  paid  and  the  salaries  of  the  board 
should  be  large  enough  to  induce  men  of  the  highest  integrity 
and  experience  to  accept  office.  Then  the  balance  should  be 
distributed  among  the  cities  and  towns  not  necessarily  accord- 
ing to  the  amount  collected  from  the  citizens  of  each,  or  accord- 
ing to  the  property  valuation  of  each  but  according  to  the  needs 
of  each  city  and  town  in  the  Commonwealth,  to  be  determined 
by  the  state  board  on  the  basis  of  reasonable  and  proper  expendi- 
tures of  the  city  or  town  for  the  year  past.  This  plan  of  dis- 
tribution is  not  new  and  was  suggested,  I  believe,  first  by  Mr. 
Purdy  of  New  York  for  the  distribution  of  the  corporation  tax. 

The  income  tax  would  have  a  tendency  to  make  men  of 
affairs  and  large  means  live  in  the  cities  and  if  the  whole  of  the 
income  tax  collected  from  them  was  given  to  those  cities  it  would 
be  hard  upon  the  smaller  cities  and  towns  and  the  surplus  over 
and  above  what  the  cities  of  residence  need  for  their  reasonable 
expenditures  should  go  to  those  cities  and  towns  in  need  of  it. 
If  one  town,  having  unusual  advantages  for  residence,  has  a 
large  number  of  wealthy  residents,  a  part  of  its  revenue  not 
needed  for  its  own  expenditures  could  very  properly  be  dis- 
tributed among  its  less  fortunate  brothers.  The  effect  would 
be  to  make  the  local  tax  rate  on  property  more  uniform  through- 
out the  state,  a  result  greatly  to  be  desired.  A  small  commu- 
nity would  not  have  to  have  a  $25  tax  rate  in  order  to  support 
its  schools  and  build  its  roads. 

I  do  not  believe  in  taxing  the  same  income  twice,  and  if  a 
partnership  makes  return  as  it  should  and  pays  the  income  tax 
the  members  of  the  firm  should  not  be  taxed  again.  No  income 
tax  should  be  collected  from  corporations,  the  individual  residing 
in  the  state  paying  the  tax,  and  Massachusetts  has  no  right  to 
collect  an  income  tax  from  non-resident  stockholders.  I  can  see 
no  reason  why  income  from  real  estate  should  be  exempt  any 
more  than  income  from  any  other  property  and  to  exempt  in- 
come from  all  property  taxed  of  itself  would  defeat  the  income 
tax. 

CONCLUSION. 

The  situation  in  Massachusetts  is  now  well-nigh  intolerable 
and  if  we  can  judge  from  some  of  the  tax  measures  before  the 
Legislature  and  their  supporters,  things  are  to  go  from  bad  to 
worse.  There  must  be  a  complete  and  radical  change  in  the 
whole  system  of  taxation  and  I  believe  the  solution  will  be  found 
in  confining  the  state  to  excises,  with  the  inheritance  tax  and  the 
corporation  tax  as  the  chief  revenue  producers,  and  leaving  prop- 
erty taxes  to  the  cities  and  towns  with  an  income  tax  that  will 
test  the  honesty  and  good  faith  of  the  citizens  and,  if  my  trust 
in  that  honesty  and  good  faith  is  well  placed,  will  yield  revenue 


32 

double  and  treble  that  now  derived  from  taxing  intangibles  and 
tangible  property  used  in  promoting  prosperity. 

My  plan  of  altogether  exempting  intangible  property  and 
personal  property  used  in  manufactures,  business,  trade  and 
farming  is  not  necessarily  unconstitutional  in  Massachusetts. 
This  may  perhaps  be  done  to  avoid  double  taxation  or  for  any 
other  justifiable  reason  (Opinions  of  the  Justices,  195  Mass. 
607,  614),  and  I  believe  that  an  income  tax  imposed  at  a  uniform 
rate  throughout  the  state  is  constitutional.  The  constitution 
should  not  be  allowed  to  stand  in  the  way,  however,  of  a  new 
system  of  taxation  which  offers  relief  from  the  present  situation. 
Let  the  Legislature  agree  upon  a  system  and  if  the  Supreme 
Court  declares  certain  portions  of  it  unconstitutional,  pass  a 
resolve  for  an  amendment  to  meet  the  objections.  It  is  neither 
necessary  nor  desirable  to  proceed  in  advance  to  amend  the  con- 
stitution generally  and  so  open  the  door  to  reckless  legislation. 


TC  23216 


t 


